Palm's failure to take on iPhone casts doubt on Nokia, Microsoft

The high profile failure of Palm's efforts to revitalize its flagging smartphone business with the Pre's new webOS has analysts casting doubt over parallel phone platform reinvention efforts by others, including Nokia's Symbian and Microsoft's Windows Phone 7.

A year ago, Palm's webOS-based Pre was widely hailed as the strongest contender to the iPhone's crown in smartphones. Palm had originally helped invent the smartphone category, only to lose its position prior to the arrival of the iPhone.

Several iPhone engineers joined former iPod executive Jon Rubinstein to spearhead a new smartphone platform for Palm, resulting in a well received product introduction last winter. Following its debut at the 2009 Consumer Electronics Show, the Palm Pre dominated the headlines for months, at least until Apple released the iPhone 3GS, nullifying many of its unique features, including its faster processor.

The failure of the once hotly anticipated webOS to gain traction over the last year does not hold out much hope for Nokia's efforts to turn its aging Symbian platform around as an open source project. Nor does it inspire confidence in Microsoft's new WP7 initiative, which buries Windows Mobile and all of its third party apps in a 'risk it all' venture to start over from zero, nearly two years after Palm attempted to do something very similar in ditching its old Palm OS for the entirely new webOS.

Palm's failed promise

Palm's webOS hype quickly dissipated last year as the company struggled to complete its Software Development Kit for third party apps and as initial sales failed to meet initial expectations. Palm's new phone was tied to Sprint, which boasted low contract prices and better service in some key markets than AT&T, but that wasn't enough to cause significant numbers of iPhone users to defect, as one of Palm's key investors had predicted.

Palm's latest earnings report has resulted in analysts such as Shaw Wu of Kaufman Bros. downgrading their rating for Palm from Hold to Sell, as the company's stock tanked. "We are less confident in the company's prospects as an on-going concern," Wu wrote in a note.

"While we believe Palm has some value with its webOS and tight integration of hardware and software," Wu concluded, "we are unsure of the company's prospects as an ongoing concern. Because the company will likely not be profitable for the foreseeable future, we think using EPS is a futile exercise. Our price target of $3 is based on what we think webOS could be worth which is the $600 million in investment developing the proprietary software."

Wu described three likely scenarios for Palm going forward, writing, "one, the company gets sold but could be a take-under; two, the company needs to raise more capital; or three, the company runs out of money."

Will AT&T save Palm?

Palm's announcement that it would be bringing the Pre and other webOS devices to AT&T didn't do much to alleviate analysts' concerns. In a separate note, Wu wrote that Palm's existing partners have not been able to sell its phones even without direct competition from the iPhone.

Wu wrote that Palm had only shipped 825,000 smartphones, roughly 175,000 short of the original expectation of a million units. "While Verizon Wireless has received a lot of attention for the shortfall, our understanding is that Sprint is also to blame," he added.

"We find it somewhat unusual that the companies [AT&T and Palm] didn't make this announcement closer to an actual launch date but instead said it would arrive in 'the coming months,'" Wu wrote in a separate note on Palm's AT&T expansion.

"While we are pleased to see Palm expand its footprint, we are unsure how meaningful the impact will be as we believe AT&T is the most competitive carrier out there being the exclusive partner for iPhone in the U.S. We believe Palm's price points are arguably too high when one can get an iPhone 3G for $99 and a BlackBerry for as little as $9.99."

Rather than banking on AT&T, Wu wrote, "We continue to believe Verizon is its best shot at success given iPhone's lack of presence, however, so far customers continue to gravitate toward BlackBerry and to a lesser extent, Android."

Needham on Palm

Charlie Wolf, writing for Needham & Company, echoed many of the same concerns about Palm, noting that the company's results "were a lot worse than it appears. Shipments out of the carrier channel of 408,000 units were less than half of the 960,000 units shipped into the channel. The carriers eyes were clearly bigger than their stomachs."

Since Palm has stuffed the channel with inventory, its sales next quarter will appear to be even worse as its carrier partners work to push all of that inventory out to customers. Wolf blamed poor sales on late training of carrier employees, writing that "the most identifiable culprit for the shortfall was a lack of visibility, especially in Verizons carrier stores." He said that Palm didn't begin intensive in-store training, including "seeding many of the sales people with Pre models," until this February.

That's an issue that also faces Nokia and Microsoft, neither of which have a retail network like Apple's to sell and support new models. While Apple ships a major new iPhone product every summer, Symbian and Windows Mobile phones, just like Android, BlackBerry, and Palm's webOS devices, have all deluged the market with a flurry of scores of models that carriers simply can't sell as retail experts.

Palm Pummeling Portends Problems

A report by Eric Jhonsa for Fool.com similarly extends Palm's troubles to other competitors, writing that "the company's failings show why Microsoft will eventually join it on the list of firms whose smartphone comeback plans flamed out. And perhaps Nokia as well."

Microsoft's WP7 phones aren't shipping until the end of 2010 by the earliest, and the fact that they break all compatibility with the existing apps for the Windows Mobile 6.x platform and that the new system won't be able to be installed on existing Windows Mobile phones means that Microsoft will be "basically starting over from scratch," Jhonsa wrote.

If anything, the company's existing mobile developers and phone owners may be irritated enough with its scorched earth policy that they are likely to give up and head to a more viable platform.

"Nokia is trying to do something similar with its upcoming Symbian operating systems," Jhonsa wrote. "To be fair, Nokia is in much better shape than Microsoft. Market researcher IDC estimated that the company still accounted for 38.2% of global smartphone shipments in the fourth quarter of 2009. But the company's revenue share is undoubtedly much lower, thanks to a relatively low average selling price. And IDC's rosy number sidesteps how Nokia has become a marginal player in North America, and has lost considerable share in Western Europe, where Apple and RIM have made strong inroads."

Jhonsa's report concluded, "Microsoft and Nokia deserve credit for not resigning themselves to further market share losses at the hands of Apple, RIM, and Google, and for showing a willingness to innovate with their latest smartphone platforms. But if Palm's stumbles are any sign, that might not be enough."